The Future of Biorefining Policy

This summer’s intense political standoff regarding the debt ceiling and reduction clearly indicates how difficult it is to get anything done in Washington right now, especially when it comes to programs and incentives that require additional spending. With the nation already gearing up for what promises to be an intense 2012 presidential race, it could be more than a year before federal lawmakers seriously address the extension, revision and funding of incentives and programs that benefit biorefiners.

The biodiesel blender tax credit and Volumetric Ethanol Excise Tax Credit are set to expire at the close of 2011. Even more important to second-generation producers, the tax credit for cellulosic ethanol production is set to expire at the close of 2012. Congress has yet to authorize funding for the next fiscal year, which starts Oct. 1, for the Energy Title programs of the Farm Bill, which includes the Biomass Crop Assistance Program. Furthermore, it remains unclear if Congress will reauthorize those programs in the next version Farm Bill. In other words, many of the programs, policies and incentives that the biorefining industry is relying on to help spur development and growth may soon be on Congress’ financial chopping block. Bringing one bright spot to the policy mix right now, the U.S. Department of Defense seems to be stepping up its efforts to support the development of renewable fuels.

Tax Policy

While some in the industry doubt that a Congress so focused on debt reduction will extend VEETC and the biodiesel tax credit, Greg Jenner, a partner in Stoel Rives LLP’s tax practice, offers a unique take on the situation. “We are probably not at the point yet where Congress is ready to look at fundamental tax reform,” he says. “So, I would say that the chances of the various provisions getting extended are fair to good for awhile, but I think we are reaching a point where Congress is going to have to make some tough choices, including fundamental tax reform. If that happens, I think the prospects for those incentives will go down tremendously. Fundamental tax reform is by its nature inconsistent with providing all these incentives through the tax code.”

Jenner helped write the Tax Reform Act of 1986, which was the last time Congress fundamentally reformed our nation’s tax structure. As a part of that type of reform, incentives are virtually wiped out of the tax code. “The way the dynamic works is that nobody will tolerate giving up their incentives if other people are retaining theirs,” Jenner says. “It becomes either we’re all going off the cliff together, or nobody goes over the cliff. In other words, it fails. The nature of a fundamental restructuring of the tax code is these incentives go away. They have to go away, otherwise you can’t do reform.” However, Jenner adds that, over time, incentives do creep back into the tax code.

That being said, Jenner stresses that federal lawmakers likely wouldn’t consider making such significant changes to the tax structure until 2013. This year is nearly over, and in 2012 the focus will be on the presidential election. There tends to be little appetite for major legislation in an election year, Jenner says.

Although the tax credit for cellulosic biofuels is on the books through the end of 2012, there is already concern that it may not be addressed for renewal next year. “We are talking about a tax extension situation that will be during an absurdly contentious presidential reelection year,” says Brooke Coleman, executive director of the Advanced Ethanol Council. “That is no small problem. The other problem for our industry is even when you get tax incentives incrementally extended for one more year, or two more years, it doesn’t erase the uncertainty of what happens when it expires.” Those looking to invest in the advanced biofuels sector need certainty those credits will be around long enough to benefit their projects. A one- or two-year extension simply isn’t enough.

The type of action the congressional super committee might be willing to take is less clear. The super committee was created by the Budget Control Actof 2011, which was passed in August to raise the debt ceiling. The committee is tasked with crafting a deficit reduction bill, which will then face an up or down vote in the Senate and House of Representatives. Once the bill reaches the congressional floor, lawmakers cannot filibuster or modify it with amendments.

While the super committee could eliminate tax incentives for biofuels in the bill it crafts, Jenner says he thinks that is unlikely. “The one thing that I could see them taking on would be corn-based ethanol,” he said. “I could see that, but I wouldn’t bet on it.”

“We are in a fairly volatile time, but at this point there doesn’t seem to be any consensus on where we go—other than the fact that we’ve got to do something to fix the budget program,” Jenner says. If we are unable to get a handle on the budget, we will be in a long era in which Congress cannot afford to create new incentives, he adds, or even renew old ones.

BCAP and Beyond

Tax credits are not the only federal incentives out there to support the biorefining industry. One obvious alternative includes the programs contained within the Energy Title of the most recent Farm Bill. Many of these programs, including BCAP, have been specifically designed to help the advanced and cellulosic biofuels industries move towards commercial production.

While BCAP got off to a somewhat rocky start, it finally began to gain traction this year. In July, the USDA announced four new BCAP project areas, bringing the total to nine project areas spanning an estimated 330,000 acres. Now, as the program finally seems to be hitting its stride, its future has become increasingly uncertain.

Funding for the current fiscal year has already been allocated, and Congress has yet to authorize funding for the program in fiscal year 2012 beginning Oct. 1. According to Todd Atkinson, chief of staff at the USDA’s Farm Service Agency, the House has passed an agricultural appropriations bill that would zero out funding for BCAP. The Senate has yet to act on its version. Following an action by the Senate, the bills will move to a conference committee, where they are reconciled. It’s impossible to guess whether the final legislation will include funding for BCAP. Congress will also soon begin work on the 2012 Farm Bill, which may or may not include the reauthorization of the Energy Title programs.

According to Brent Erickson, vice president of the Biotechnology Industry Organization’s Industrial & Environmental Section, it would set back progress in the biorefining industry if Congress does not authorize additional BCAP funding and reauthorize the program. “I think it would be really unfortunate,” he says. “We’re at a point where the [cellulosic and advanced biofuels industries] could become a reality and we need to help farmers who would produce those crops.”

Coleman agrees, and adds that it would be detrimental to eliminate programs that haven’t had sufficient time to benefit the industry. When the Energy Title was written, Coleman says it would have been impossible for lawmakers to anticipate we were about to enter a global recession that would push back development in many industries, including cellulosic biofuels. “The Farm Bill anticipated that the cellulosic ethanol industry would be [building out] to commercial scale,” he says. However, a lack of available capital led many projects to be delayed several years. “Letting these programs die on the vine just because the industry didn’t accelerate fast enough during a global recession to take advantage of them is just totally shortsighted,” Coleman says.

Mary Rosenthal, executive director of the Algal Biomass Organization, adds that eliminating programs like BCAP would run counter to Congress’ imperative of job creation and economic development, to which both parties seem to be committed. “It’s our job to make the case that the return on the investment in these programs is significant,” she says.

Ideally, Erickson says BIO would like to see Congress develop a robust tax credit for all advanced biofuels, followed by a robust energy title in the Farm Bill. “That would not only help get commercial-scale biorefineries built, but also get the bioenergy infrastructure built in terms of the crops that we are going to need, which are really the crude oil in a sense, to [feed] these biorefineries that we are going to build to make fuels and chemicals.”

The Military Advances

While the future of congressional action is unclear, the Department of Defense is stepping up its efforts to support the advanced biofuels sector. Inmid-August the USDA, U.S. DOE and Navy announced that they will invest up to $510 million over the next three years in partnership with the private sector to produce advanced drop-in aviation and marine biofuels. The initiative has been developed in response to a directive issued by President Obama last spring as part of the Blueprint for a Secure Energy Future, and is being steered by the White House Biofuels Interagency Work Group and Rural Council.

To accelerate the production of biobased jet and diesel fuels, Secretary of Agriculture Tom Vilsack, Secretary of Energy Steven Chu and Secretary of the Navy Ray Mabus have developed a plan to construct or retrofit several drop-in biofuel biorefineries. Under the plan, the three departments’ $510 million investment will be matched with at least a one-to-one cost share by private industry.

“I think this has been a real paradigm shift where the military services have realized that, from a strategic point of view, biofuels are very important in terms of cost and security of supply,” Erickson says. “We are seeing a lot of robust interest on the part of all of the services now in trying to get biofuels developed. It’s really important that we have domestically produced fuels for our national defense efforts, so the fact that the DOD is now throwing its weight behind biofuels, I think is going to give the industry a boost.”

Rosenthal also notes that the initiative will be beneficial to industry. “It’s a shot in the arm, for sure, although I’m not alone in wishing it could have been at least double that,” she says. “But we’re grateful. For years the military has led in testing and sending a strong signal to the market that it will be the first customer. By bringing significant investment capital to the table, I expect that it will accelerate the development of several cutting-edge biorefineries that can produce renewable fuel at competitive prices.”

Shortly before the announcement was made, Mabus appeared on Platts Energy Week, where he talked about the Navy’s goals and ambitions for biobased fuels. During that appearance, Mabus noted that he has testified before congressional hearings in an effort to encourage the revision of military offtake agreements for fuels. The military is currently limited to five-year off-take agreements. A longer contracting horizon, of up to 30 years, could provide some market certainty that biorefining companies could leverage in an effort to secure capital.

According to Erickson, BIO has been very actively advocating for a revision of the military’s contracting abilities. “If you are going to get financing for a biorefinery and you can go to the bank and say you’ve got a 20-year contract with the Department of Defense, that is going to go a long way to help get financing,” he says.

Rosenthal calls the revision critical. “Right now, the projects are too big for traditional venture capital,” she says. “With the debt markets and institutional funds still treading water in this investment climate, something must be done. A 15-plus year offtake agreement from the U.S. government significantly reduces the risk for private investment, so I think you’d see a number of facilities be built sooner if there was this provision.”Congress is one avenue through which that revision could be implemented, but Erickson notes it’s not the only option. “Some people have suggested that President Obama needs to make a presidential finding under the Defense Production Act,” Erickson says, “so that he could make biofuels a special category of strategic product, which would give it all sorts of special privileges in contracting and raising its visibility, and making it a strategic commodity.”

No matter what actions Congress ultimately takes or does not take over the next year, the biorefining industry will face a challenge in educating Congress on the benefits of biofuels, and in working to overcome uncertainty associated with the current political environment. “Congressmen, who are very busy, just tend to think about biofuels as being ethanol, but the technologies have proliferated and there are so many different advanced technologies right now,” Erickson says. “It’s been a challenge and will continue to be a challenge, to educate policymakers on how advanced biofuels are being produced, what technologies are being used, how they impact specific lawmakers states.”

Rosenthal adds that another challenge is that too many members of Congress think that tax credits and incentives are a handout rather than an investment. “We all need to keep making the economic case for investments in new technologies,” she says. “As far as ABO is concerned, we need to make sure that Congress knows that our industry is a 50-state job-creating engine. We are literally striking oil in all 50 states, except ours comes from above ground and our wells never run dry.”

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